by Tom Doan
A common question I receive is “what should I do with my cash balance?” Traditional investment strategies will likely invest the entire cash balance into mutual funds and various other investment instruments. But with the Snider Method, your portfolio may be 40-60% in cash and many clients feel like it is just sitting on the sidelines doing nothing. In actuality, the cash balance is a very important part of the Snider Method. Let’s take a look at the cash balance’s two main functions.
When you generate new positions, there is an Allocated Cash amount for each position. The Allocated Cash is how much cash you have set aside for purchases of that particular position. The Snider Method uses dollar-cost averaging, so instead of buying all the shares at once, shares are purchased over time to spread the cost of buying the shares. Although you are only using a small portion of the cash today, you need the cash to make future purchases tomorrow. If you invest the cash balance that’s already allocated to a position and the investment loses value, you may handicap your ability to make future purchases.
In periods where the market declines, if you are fully invested in the market, your portfolio will feel the full effect. However, in the Snider Method the cash balance acts as a buffer. In down markets, this will help prevent your portfolio by declining more than the market. If you decide to invest the cash balance in other stocks, you are exposing the entire account to market risk compared to just 40-60% with the cash balance.
In previous years, we would be able to invest the cash balance in T-Bills. This provided a short-term investment that could increase the interest the cash earned and maintain the value of the cash through a safe investment. The low-risk and liquidity of T-Bills preserved the two main attributes of the cash balance, Allocated Cash and market buffer. However, in today’s low-interest environment, T-Bills will actually cost more in commissions than the amount of interest they would generate. If interest rates increase in the future, T-Bills may once again become a viable investment for your cash balance.